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Economics in a picture

Economics in a picture

According to different approaches, fiscal policy contributed to mitigate the drop in Portuguese GDP in 2020


Real GDP rate of change in Portugal in 2020: observed and excluding fiscal effects


Governments affect the economy through various channels. This intervention encompasses both the effects stemming from governments’ discretionary decisions – synthetized as the fiscal stance - and those associated to the automatic reaction of fiscal aggregates to cyclical fluctuations, which occur regardless of governments’ decisions – the automatic stabilisers. 


Automatic stabilisers are conventionally assessed as the change in the cyclical component of the budget balance. Regarding the fiscal stance, it is frequently determined on the basis of a “top-down” approach focusing on the change in structural (or cyclically-adjusted) primary balance. Among other drawbacks, its excessive reliance on the output gap led to the emergence of alternative metrics. These include narrative approaches – which evaluate active fiscal policy using inventories of measures – and mixed methods combining elements of the two approaches. Braz and Campos (2021) propose an alternative mixed approach that provides robust results in normal times.

The three alternatives provide broadly similar results for the fiscal stance in Portugal in 2020 amidst the COVID-19 pandemic. Still, in light of the specificities of the year, the “top-down” method can be assessed as the most accurate.  According to these methods, the impact on economic activity stemming from fiscal policy changes in Portugal in 2020 (both discretionary and automatic) was non-negligible: in their absence, real GDP growth could have dropped by at least around 11% instead of the observed 7.6%.

For more details see Braz and Campos (2021), “Challenges in measuring fiscal effects”, Economic Studies, Banco de Portugal, Vol. VII – No 3, July

Prepared by Cláudia Braz and Maria Manuel Campos. The opinions expressed herein are those of the authors and do not necessarily coincide with those of Banco de Portugal or the Eurosystem.

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